By Matthew Boyle
This week is a busy week for data as Eurozone inflation data is released on Wednesday and on Thursday we see the Bank of England announce the heavily anticipated interest rate decision.
With the tug-o-war between the two central banks ongoing, and interest rates driving exchange rates for some time now, all eyes will be watching in what could be a pivotal week.
A good Euro inflation figure for Europe could encourage the European Central Bank to drop interest rates again and for the second time. Perhaps more critical for GBP>EUR rates though is the Bank of England interest rate decision on Thursday.
After months of interest rate rises inflation finally hit 2% in June – the long-awaited target for Bank of England and a sign that interest rates could be lowered. This pushed economists to price in a 65-70% likelihood that the BoE would drop rates in August following the general election and change from a Tory to Labour Government. Despite fears a more socialist government would weaken the Pound, GBP remained strong – seeing the Pound hold around the best levels against the single currency we have seen in 2 years. It should be noted though this was largely helped by the ECB cutting interest rates resulting in a weaker Euro keeping rates high.
UK inflation held at 2% in July, which whilst is not bad news for the economy has left markets questioning: will the BoE cut or not? Should they cut rates, this would likely see GBP buying rates drop, and indeed in the last week we have seen rates start to position accordingly.
Wednesday is the first hurdle, should we see the Euro post lower inflation then Euro buying rates will perhaps improve. In addition, should he BoE not drop rates this month it is likely in the coming weeks we will see markets position for a cut at the next meeting instead.
Without doubt the Pound could be tested this week. And with rates still within reach of the best they have been in two years, it may be a risky business gambling to gain a small improvement whilst risking what could be a huge drop the other side.
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